financial analysis of depository institutions finance 129 drake university
TRANSCRIPT
Financial Analysis ofDepository Institutions
Finance 129Drake University
Basic Financial Statements
Report of ConditionBalance Sheet
Report of IncomeIncome Statement
Funds Flow StatementSources and Uses of Funds
Statement of Stockholders Equity
Balance Sheet
Financial Outputs(uses of Bank Funds or Assets)
Cash (primary reserves)
Liquid Security Holdings(secondary Reserves)
Investments in SecuritiesLoans
ConsumerReal EstateAgFin InstitutionsMics Loans
Misc
Financial Inputs(Sources of Funds or
Liabilities and Owners Equity)
Deposits from PublicDemandNOW’sMoney marketsSavingsTime
Nondeposit BorrowingsEquity Capital
StockSurplusRetained EarningsCapital reserves
Balance Sheet continued
As with any balance sheetAssets = Liabilities + Owners Equity
orAccumulated uses Accumulated
sourcesof bank funds of bank funds
=
Balance Sheet Components Assets
The Cash Accountincludes: Cash in the vault, deposits with other banks, cash items in the process of collection and reserve accounts with the Federal ReserveTraditionally banks attempt to keep this account as low as possiblePrimary reserves since it is banks first line of defense against withdraws Generate little income
Balance Sheet Components Assets
Investment Securities: The Liquid PortionQuickly converted into cashSecondary reserves
Investment Securities: Income Generating Portion
Taxable and nontaxableCan be recorded at original cost or market value or the lower of the twoMore important recently
Balance Sheet Components Assets
LoansLargest AssetGenerally broken down by purpose of loans –
Different risk (& return) and liquidity of each loan typeChoice of loan type impacts interest income
Gross loans -- total of all outstandingAllowance for Loan losses (ALL account)
PLL on income statement
Gross minus ALL = Net Loans
Balance Sheet Components Assets
ALL accountoften divided into two sections, specific reserves, and general reservesTax reform Act of 1986
only loans actually declared uncollectable can be expensed through the ALL accountsdecreased use of ALL accountsPermanent capital
Balance Sheet Components Assets
Federal Funds Sold Securities Purchased under Resale AgreementsCustomers liability AcceptancesMisc Assets
Balance Sheet Components Liabilities
Deposits (Impacts Interest expense)Noninterest bearingSavingsNOW accountsMoney Market AccountsTime Deposits
Borrowings from Nondeposit sources (Int Exp)Capital Accounts
Book vs. “Fair Value”
Banks have traditionally recorded balance sheet entries at original cost (book value or historical cost accounting -- ammoritzed cost)Implies that interest rate fluctuations would not impact valuesFair Value -- current market value
Arguments against Fair Value
Increased in the volatility of earningsGreater instability in stock prices of banksLoss of bank capital cushionsLack of resale market
Income Statement or Report of Income
Revenue ItemsInterest Income (interest generated from loans normally accounts for most income -- generally more than 2/3 of total income)Non interest income (fee income, etc.) Increasingly important. Non interest income also includes securities gains (or losses). Now subject to standard tax rate
Report of IncomeExpenses
Interest Expenselargest expense is interest paid on deposits, often between 50 and 60% of total expensesVaries based on type of depositsfed funds borrowing and repurchase agreements have grown in importance.
Non interest expensewages, salaries and other personnel expenses+
Income
Net Interest Income = Total Interest Income -Total Interest ExpenseAlso referred to as interest margin
Net incomeAdds non interest income and subtracts non interest expense to net interest income.
Income Statement
Interest IncomeInterest on loans, Interest on securities, Other
Interest ExpenseDeposit Interest, Short term debt, Long Term debt
Net Interest IncomeNon interest Income
Service Charges, Trust Department, OtherNon interest Expense
Wages, Net occupancy, Other operating expensesIncome before taxesProvision for income taxes
Net income after taxes
Funds - Flow Statement
Funds from operations+ decreases in bank assets+ increases in bank liabilitiesFunds provided to the bank
Dividends paid out to stockholders
+ increase in banks assets+ decreases in bank
liabilitiesFunds Used by the bank
=
Capital Account Statement
Beginning Balance + Net income - Dividends paid to shareholders+ New Shares of Stock issued - Purchases of treasury stockBalance at end of period
Common Characteristics of Banks Financial
Statements
Heavy dependence on borrowed fundsEarnings are exposed to risk if borrowings cannot be repaid
Growing use of nondeposit borrowingsBank must hold a significant proportion of high quality and marketable securities
Financial Assets are more important than plants and equipment
few fixed costs and limited use of operating leverage.
Evaluating and Measuring Bank Performance
Going to use ratio analysis to evaluate the performance of depository institutionsBank data is available in the call reports and via the Uniform Bank Performance Report (UBPR).
Obtaining Information on Banks
Data for banks is available from the Uniform Bank Performance Report (UBPR).UBPR developed by the Fed, FDIC, and office of the comptroller of Currency so that there would be a standardized way to compare institutions.Also peer group and state reports for comparable banks.
UBPR
Goal is to provide uniform reporting of informationDeveloped by the Federal Financial Institutions Examination Council’s quarterly reports.Available online at www.FFIEC.org
Using the UBPR
Compare across yearseach report has 5 years of dataYear end or current quarter plus 1 year prior to current and three previous years
Compare to peer groupsalso available are peer groups reports based on both size of bank and geographic locationAllows you to benchmark
ROE and ROA
ROE measure the rate of return flowing to the banks shareholders
ROA measures managerial efficiency -- how well management converts assets into net earnings. The UBPR uses average assets instead of total assets.
CapitalEquity Total
safter taxe incomeNet ROE
Assets Total
safter taxe incomeNet ROA
Relationship between ROE and ROA
Assets Total
Assets Total
Equity Total
IncomeNet ROE
MultiplierEquity ROA
Equity Total
Assets Total
Assets Total
IncomeNet ROE
DuPont Identity
Equity Total
AssetsROA ROE
Assets Total
Income Total
Income Total
IncomeNet
Assets Total
IncomeNet ROA x
nUtilizatio
Asset x
Margin
ProfitROA
Decomposition
Multiplier
Equity
onUtilitzati
Asset
Margin
ProfitROE
MultiplierEquity ROAROE
nUtilizatio
Asset x
margin
ProfitROA
Decomposition
Equity MultiplierReflects the leverage or financing policies (the choice of debt or equity)
Profit MarginReflects the effectiveness of expense management control
Asset utilizationReflects the ability to manage the mix and yield on the banks assets
Asset Utilization and Profit Margin
Both reflect Management decisions regarding:
Mix of funds raised and investedSize of Bankcontrol of operating ExpensesPricing of ServicesMinimization of tax liability
Asset Utilization
Assets Total
IncomeInterest Non IncomeInterest
Assets Total
Income Total
nUtilizatio
Asset
Assets Earning
of Volume
AssetEach
ofn Compositio
AssetEach
on Yield
Assets TotalAssets Earning
Assets TotalAssetEach
of $
Assets Total
Asseteach on
EarnedInterest
IncomeInterest
Asset Utilization
Assets Total
IncomeInterest Non IncomeInterest
Assets Total
Income Total
nUtilizatio
Asset
Assets TotalInc NonInterst
Other
Assets Total
Revenue
Trading
Assets TotalFees amd
Charges Service
Assets Total
Income
Fudiciary
IncomeInterest Non
Profit Margin
Income
TotalTaxes
Income
Income
TotalExpense
tNonInteres
Income
TotalLoanLosses
forProvision
Income
TotalExpense
Interest
Income Total
IncomeNet
Margin
Profit
Decomposition of ROA
Assets
TotalLosses Loan
For Provisons
Assets
TotalExpense
InterestNon
Assets
TotalExpense
Interest
Income
TotalExpenses
Total
Ratio
Expense
Assets TotalTaxes
Income
Expenses
Total
Revenue
Total
Assets Total
IncomeNet ROA
Decomposition of ROA Part 2
Assets TotalIncome
SpecialNet
Expense
InterestNon
Income
InterestNon
Expense
Interest
Income
Interest
Assets
TotalIncome
Net
Assets TotalTaxes
Income
Expenses
Total
Revenue
Total
Assets Total
IncomeNet ROA
Decomposition of ROA Part 2
Assets Total
Income
SpecialNet
Expense
InterestNon
Income
InterestNon
Expense
Interest
Income
Interest
Assets
TotalIncome
Net
Assets TotalExpense
InterestNon
Income
InterestNon
margin
tNoninteres
Assets TotalExpense
Interest
Income
Interest
Margin
Interest
Net
Other Important Ratios
assets Earning
incomeinterest Net Margin
InterestNet
Assets BearingInterest
ExpenseInterest
Assets Earning
IncomeInterest Spread
Assets Total Average
Incomet Noninteres - Expenset Noninteres
Ratio
Burden
Incomet Noninteres Incomeinterest Net
Expenset Noninteres
Ratio
Efficiency
Harris National
Net Income / Average AssetsLarge declineBetter relative to industry
Decomposition: Intrust Bank
Multiplier
Equity
onUtilitzati
Asset
Margin
ProfitROE
Intrust Bank12/31/2011 12/31/2012 12/31/2011 12/31/2012
Net Income 43,341 33,982 ROE 0.1217 0.1003Total Income 190,346 189,667 Profit Margin 0.2277 0.1792Total Assets 4,065,989 3,705,025 Asset Utliization 0.0468 0.0512total Equity 355,988 338,940 Equioty Multiplier 11.4217 10.9312
Using the UBPR Intrust BankPage 1
Improvement in ROE, but decrease in ROADecrease in Int Income – Low Relative to IndustryHigh real to peers in Non Int Income and Non Int Exp
Assets TotalIncome
SpecialNet
Expense
InterestNon
Income
InterestNon
Expense
Interest
Income
Interest
Assets
TotalIncome
Net
Questions: Intrust Bank
Does well in Net Income – how is there business model different than a traditional bank? How does it generate income – how well does it manage expense?Does the loan mix used by Intrust add risk?